President's Deficit Reduction Commission Begins to Focus More on Taxes

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Members of President Obama’s fiscal commission on Wednesday began to focus more on taxes and the role they might play in reducing the long-term budget deficit. But at least publicly, they weren’t talking about the most pressing tax issue – the expiration of President George W. Bush's tax cuts at the end of this year.

As the 18-member bipartisan panel met in public for the fifth time, it was becoming clear that the tax system is under its microscope and there are many ideas under review for the long term. The commission's success has always hinged on whether its leaders could muster support among Republicans for changes to the tax system, and agree to major spending cuts and changes in Social Security, Medicare and other entitlement programs that dominate the budget. So far, the GOP members are still at the table.

The most obvious target is recovering the huge amounts of revenue lost to federal tax loopholes known as “tax expenditures,” which include the home mortgage interest deduction and tax-free health premiums for employees. Proponents of rolling back these breaks say they are essentially government spending via the tax code. But health care premiums and mortgage deductions have long histories and are considered untouchable by some.

Erskine Bowles, one of the commission's co-chairmen, pointed out that these loopholes cost the Treasury as much as $1.3 trillion per year, which is larger than total tax revenue. Bowles, citing an op-ed by Reagan White House economist Martin Feldstein, suggested that tax expenditures must be part of any serious attempt to limit spending.

Maya MacGuineas, president of the Committee for a Responsible Federal Budget, told the commission that the current system of tax expenditures is "one of the most detrimental things to the country." But she also pointed out that they would be among the more difficult programs to touch.

Senate Budget Committee chairman Kent Conrad, D-N.D., who leads the commission's working group on taxes, said that he has become convinced that more comprehensive tax reform is necessary to update a system that was built for an era in which the United States did not face global competition. "My own conclusion from this [working group review] is that we really have a tax system that is badly outdated," he said. "It no longer relates to a world that we are in today."

In addition to massive lost revenue through tax expenditures, the Treasury loses another $340 billion or so each year in taxes that people owe but simply do not pay, Conrad pointed out. "These are things that require a focus in our work."

"I agree with everything Conrad said about the nature of the system," added GOP Rep. Dave Camp of Michigan, who is his party's lead on Conrad's working group. But Camp said he wasn't sure that it would be easier to pursue broad reform than to pick and choose among different tax breaks. "I'm not sure that's the reality of it," Camp said.

"I wish the American people could see these people working together side by side," said Bowles after Camp had finished. Bowles and Conrad said later they haven't discussed the expiring Bush cuts as part of their plans.

The meeting marks a rough halfway point between the commission's creation by an executive order and the due date for its recommendations, Dec. 1. Bowles lavished praise on the members for keeping things bipartisan. Then again, the commission is not yet debating specific policies.

Asked how to measure progress in this process, Conrad said it was pretty much impossible. "I don't think you can until you get to the end," he said after the hearing on Capitol Hill.

"In my experience, decisions tend to get made later rather than sooner," said Bruce Reed, the commission's executive director, after the hearing. "No one turns in their homework early."

"Everything's still on the table. Everyone's still at the table," Reed added. "We're a lot better off than we were three months ago."